10/13/10 Buenos Aires, Argentina – “This country is in a boom,” said the editor of a financial magazine in Buenos Aires. “Everything is going up. Everything is selling. And inflation is roaring at 25% per annum.”
To hear him tell it, Argentina is everything America wishes to be. Its people shop. Its restaurants are full. Its economy is growing at more than 8% a year.
Why?
“Inflation. Everyone wants to get rid of cash. You hold onto it and it’s worth less and less. So you buy an apartment.”
Amazingly less than 10% of property transactions in Argentina include mortgages. People pay with cash. Still, prices are not as low as you would expect. The lot next to our office is on the market for $250,000.
“It should be about $100,000,” said a friend who keeps an eye on real estate. “But everything is high.”
The cab ride from the airport was 70 pesos when we came 4 years ago. This time it was 128 pesos. Two glasses of wine at a local bar were 40 pesos. They would have been half that a few years ago.
“There’s a boom going on,” continued the financial editor. “But it can’t go on forever. You can’t have 25% inflation and have a healthy economy. People don’t make wise investments. They just try to avoid getting ripped off by inflation. They don’t make long-term investments. They just try to park their money where it won’t disappear. That’s why real estate is so expensive. People will save their money and buy an apartment whether they need it or not. They figure it will still be there in five or ten years. The peso won’t be. At least not today’s peso.”
Nor will the dollar.
Regards,Bill Bonner
for The Daily Reckoning

Hi, I’m afraid there’s some misinformation in that article. Restaurants packed and the economy growing 10%?Restaurants are as full as in any metropolis, specially tourists, and once you go to the suburbs you don’t SEE much restaurants to begin with. Heck no, the economy isn’t growing 10%, I’d be surprised its growing at all.

We don’t have inflation because everyone wants to get rid of their money, we have inflation because our money isn’t worth anything and inflation is rampant, we don’t even have good data on how bad inflation is because our socialist government thinks ignoring problems makes them go away.

Its not about people making investments, wise or not, its about people having to pay crazy prices for basic necessities such as food, power and taxes, that’s the real problem, not the increase in wine of cab fees.

Argentines use cash because we no longer trust banks and specially distrust this authoritarian government, and we spend that much money because that’s how bad basic necessity goods and services prices are.

It is true that people parked their money on real estate… 4 years ago.

These days? The market isn’t good. Its not easy to sell or even rent places any more, even in the downtown capital district a condo or office may go 6 months before renting. A couple years ago it would have been rented in one or two months.

One thing is true though: This situation can’t go on for long, sooner or later it will blow up. Its not realistic to spend more money to live in Buenos Aires than in most USA cities. Wages are going up, but they don’t even come close to keep up with the inflation, so that’s why we have more and more poor and more crime each passing year.

As a central bank prints more and more currency it eventually finds its way into the economy, debasing the value of the existing fiat currency and prices follow in suit.

Long before we had the cutesy term "inflation" there was more realistic terms called, "Monetary debasement" and "Depreciation".

On the contrary, when your money gained in value due to productivity and efficiency increases in the economy and business your money actually became worth more. That was called "appreciation". Outside a Howard Katz article, you won't see that too often.

Somewhere I read a good distinction between inflation and hyperinflation. Inflation is printing excess fiat currency relative to available assets which drives prices higher and hyperinflation is complete loss of faith in the fiat currency where no one will trade an asset for any amount of fiat currency so it collapses. There is a book in our local library with pictures of all the failed fiat currencies throughout the world. It's unbelievable how thick that book is. Anyone want a $100 trillion Zimbabwe note for that sandwich?

Sometimes it is a demographic one, or it could be a productivity issue.

Example, if oil gets to be rare it price will go up (supply and demand), as will items that require oil in their creation/manufacture (food/plastics, etc). The supply of money did not necessarily change.

Historically it was also relatively common with the metal currencies that inflation would tend to follow rises in population. More people meant less food per person and a tighter supply. In this case it was demand driven inflation.

Of course inflation with a fiat currency is often a monetary issue. But you could have the case of inflation being driven by a reduction in Argentinian productivity due to all the chaos.

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Fenix Lights

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